After you've worked and saved for many years and you can finally retire, I think you deserve to have the best possible investments in your portfolio. I'm about to tell you exactly how to do that.

And although this article is aimed at retirees and those getting close, this strategy can be adapted for use by investors of any age.

To be described as "ultimate," a retirement portfolio strategy had better be mighty good. This one is. It has a long historical record of "beating the market" by outperforming the Standard & Poor's 500 Index
SPX, -0.23%
— with less risk the 15.5% standard deviation of the index.

This is no accident, as this strategy is based on solid academic research. I've been describing this strategy for the better part of 20 years. When I was an adviser I used it for many clients, and I use it in my own investment portfolio.

This is the best long-term strategy I know. It works in portfolios big and small, and it doesn't require a guru, forecasts or any special knowledge. You can implement it using low-cost index funds or with commission-free exchange-traded funds for as little as $1,000.

Here's the shortest description I can give you: In a nutshell, 60% of this portfolio is a sophisticated combination of equity funds with massive world-wide diversification that includes value stocks, small-company stocks and real-estate funds added to a traditional large-cap growth stock portfolio. The other 40% is made up of short-term to intermediate-term government bonds.

I'll present this visually in six pie charts, with the whole pie representing all the money you have invested. (For more than a decade, I have been updating the numbers for this strategy annually. See 2012 report for comparison.)

Step One: The basics

The first chart has only two slices, 60% in for stocks (S&P 500 500 index) and 40% in bonds (Barclay's Government Credit Index). This is a traditional industry standard, approximating the way that pension funds, insurance companies and other large institutional investors allocate their assets. The stocks provide long-term growth, while the bonds add stability and income.

Let's use this as our benchmark. For 44 years, from January 1970 through December 2013, this portfolio would have produced a compound annual return of 8.8%. Not bad, especially considering this period included four of the most severe bear markets of the past 100 years.

Allocated this way, an initial investment of $100,000 in 1970 grew to over $4 million by the end of 2013.

Most of the details of this strategy involve the 60% stock side of the pie, and that's the main focus of this article. But the bond part is very important.

Step Two: Get bonds right

Whether your portfolio is heavy or light on bonds, the kind of bonds you own makes a huge difference to your risk and your return. I'm in favor of taking carefully calculated risks with stocks, but I believe in being very conservative with the bond part of this portfolio. Therefore it doesn't include long-term bonds or corporate bonds.

My recommended tax-deferred bond portfolio is exclusively in government bond funds: 50% intermediate-term, 30% short-term and 20% in TIPS funds for inflation protection. This is more stable than the standard mix I described above, yet it provides a very similar return.

With this change, the portfolio would have had an annualized return of 8.7% from 1970 through 2013. The industry standard I described in Step One had a standard deviation (a measure of risk) of 11.3%. This change reduces it to 10.9%.

The best is yet to come when we tweak the equity side of the portfolio.

Step Three: Add real-estate investment trusts

more from paul merriman

How does the retirement expert spend his retirement? By helping others with
theirs. More articles from author, educator and financial expert,
Paul Merriman.

Professionally managed commercial real estate, in the form of real-estate investment trusts (REITs), can reduce risk and increase return. From 1972 through 2013, REITs compounded at 10.4%, almost the same as the S&P 500 (10.5%). As you can see from the pie chart, if REITs made up 12% of this portfolio (20% of the equity slice), the annual return would have been 8.8%, but with less risk: A standard deviation of 10.4%.

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